China has announced a significant shift in its climate policy, with plans to introduce absolute carbon emissions caps in key industrial sectors starting in 2027. This move marks a departure from its current intensity-based system and lays the foundation for a fully developed national emissions trading scheme (ETS) by 2030.

A New Era of Carbon Regulation

The announcement came jointly from the State Council and the Central Committee of the Communist Party, signaling the government’s growing commitment to tighter climate controls. While China’s current ETS, officially launched in 2021, operates on a carbon intensity basis where emission allowances are tied to output levels the new framework will set fixed emission ceilings, regardless of production volume. This approach is widely seen as a more effective method to control and reduce overall greenhouse gas emissions.

From Pilot Programs to National Coverage

China’s initial efforts included eight regional pilot ETS programs that used gradually declining intensity benchmarks rather than firm caps. The upcoming transition will scale this effort nationally, establishing clear annual emission limits for participating industries. Analysts expect sectors such as chemicals, petrochemicals, domestic aviation, and papermaking to be among the first to adopt absolute caps. These additions build on earlier plans to incorporate steel, cement, and aluminium industries that collectively produce a majority of China’s industrial carbon output.

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Market Expansion and Financial Sector Involvement

A key element of the reform is the inclusion of financial institutions and banks in the carbon market. Their participation is expected to inject liquidity and improve the efficiency of price discovery within the ETS. Broader market engagement may also help deepen trading activity and establish more stable carbon pricing benchmarks, which have remained volatile under the current system.

Companies will continue to receive free carbon emissions allowances, but those exceeding their limits will need to buy additional permits. If they emit less than their allocation, they can sell the surplus credits, creating a financial incentive to decarbonize operations. However, critics argue that unless the volume of free allowances is gradually reduced, the market may fall short of delivering meaningful emissions reductions.

A Milestone on the Path to Carbon Neutrality

This policy shift aligns with China's broader climate objectives, including its target to peak emissions before 2030 and reach carbon neutrality by 2060. Moving toward a cap-based model signals a more ambitious stance and brings China’s carbon market closer to the frameworks seen in the European Union and other mature trading systems.

Experts caution that the effectiveness of the upcoming ETS will depend on the transparency of allocation methods, the accuracy of emissions reporting, and a gradual tightening of caps. Still, the commitment to firm limits reflects growing pressure on China, the world’s largest emitter, to play a stronger role in the global climate response.

Outlook for Industry and Policy

With just a few years until implementation, industries are expected to prepare for a more stringent regulatory environment. The inclusion of heavy emitters in the expanded ETS will likely drive investment in cleaner technologies and energy efficiency improvements. Meanwhile, the financial sector’s entry could spur the development of carbon trading tools, hedging strategies, and climate-linked investment products.

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As policymakers move toward a national carbon cap-and-trade system, they will need to balance industrial competitiveness with environmental goals. The success of China’s ETS could serve as a model for other emerging economies navigating similar challenges in their transition to low-carbon growth.

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